Here’s the situation: you’re about to lend a large sum of cash to a friend, relative, or business partner, without any official contract. Of course, the situation can be the other way around, when you borrow money from someone unofficially. Though trust is a nice thing to have, it’s not a mistake to make things legal and cover yourself.
That’s where a promissory note comes into play. It’s a written instrument issued by the borrower and addressed to a lender. If you borrow money, you get the cash and use this document as a promise to pay it back as agreed. It contains all the agreement details, almost like any official contract. On this page, see what you should know before lending money to someone.
For most people, a promissory note is a piece of paper with words, numbers, or stamps on it. However, it’s much more than that because it’s a written agreement to pay a certain sum of money to another party under certain terms. It gives both of them certainty and spares them of legal battles and sleepless nights due to some outstanding debts.
What Exactly a Promissory Note Is
As said, a promissory note is a formal and legal tool in which a borrower is obliged to repay the borrowed amount to a lender on or before the agreed date. It’s almost like an IOU, but with more formalities – it’s more structured and carries some legal weight. That can prevent many problems, as this document clearly outlines loan details, making the obligations of both parties explicit.
You can use this document in both secured and unsecured arrangements. Just like a loan, a secured note is backed up with collateral, while an unsecured one isn’t. In this case, you (as a borrower) can offer collateral – a property, vehicle, or any other valuable asset. On the other hand, an unsecured promissory note doesn’t call for extra security, relying solely on your promise to repay the debt.
Promissory notes serve a good purpose since they’re legally binding. They specify all loan details, so the chance of misunderstanding is almost none. These documents also state the punitive measures, extra fees, and consequences in case of loan default. And when everything is crystal clear, you can avoid any conflicts arising.
When to Write a Promissory Note
There are specific cases when to use this tool. It can help you plan the right approach to a loan and ensure safety for both you and a lender (when you’re the borrower). In any case, it’s the agreement in a written form and protects both parties from dubious deals.
Of all types of loans, personal loans mostly ask for a promissory note. If one is lending money to you and wishes to avoid any misunderstanding, they create this document, and you sign it up (upon agreeing with loan terms). It can prevent future incidents and conflicts as well as ensure that there’s no unnecessary tension between the parties involved.
In business, a promissory note helps in establishing the agreements of loans among business people or financiers, and for corporate borrowing. This document avails a repayment plan, charges, APRs, and other terms to ensure that all members comprehend what the agreement holds.
Promissory notes are of great importance in real estate business deals, too. That’s where big amounts of money are used in transactions, so these have to be secured somehow. You can visit https://www.billigeforbrukslån.no/lån-med-betalingsanmerkning/ to get more details on loans including this document.
Who Writes a Promissory Note
Both parties included in the lending arrangement have the responsibility of writing a promissory note. It’s a mutual agreement between them, so both must be familiar with and consent to the loan terms. Still, the lender has an interest in making sure these are well-understood and legally sound.
The lender prepares or, at least, takes part in document preparation. The borrower should also participate, in one way or the other. They must review and accept the terms and conditions stated in the promissory note. Only that way can this agreement be valid and prevent possible misreadings and conflicts.
Sometimes, a good idea is to hire a professional to prepare this document. That can be a lawyer or a financial advisor who can help you check the document. They can also ensure that all the legal procedures are met and that the interests of both parties are well represented. That can be especially important in the case of big loans.
It can also be helpful to have a third party involved as a witness or notary. They can be present during promissory note signing. Eventually, that adds another level of security, verification, and authenticity to the lending agreement.
Benefits of Promissory Notes
Promissory notes must be beneficial in many ways to make financial decisions more certain and safer. Simply put, everyone must be clear with loan terms and aware of their responsibilities. Firstly, they offer written records that follow the loan terms in detail (the amount, tenure, fees, etc.), so as the consequences of missing the agreed repayment deadline or not following the schedule.
Next, promissory notes are completely legal. To be specific, if you fail to meet the agreed terms, then the lender has every legal right to recover their loss through legal proceedings. That brings them some piece of mind and obliges you to do your best not to default on debt repayment.
In this particular case, promissory notes shouldn’t compromise personal or professional relationships. With a written agreement, both parties set their expectations, capabilities, and responsibilities, hence avoiding conflict. Unlike verbal agreements, these cause no confusion and are simple to assert in court.
Tips on Writing a Promissory Note
Writing this document isn’t rocket science, but you still must follow some basic guidelines to create a clear and concise legal document. So, first and foremost, there should be no ambiguity and vagueness. Avoid complex terms that may have multiple meanings. Make sure all parties understand all terms well.
Follow the note structure and include all relevant details. If you miss any detail, then the whole purpose of the operation may be lost. So always double-check whether the following is stated: loan amount, the interest rate (if any) and its type, tenure, and possible fee for not following the note.
Specify the exact time intervals when payments are expected and how they should be made. Also, it’s always good to specify possible penalties for late payment or non-payment, so that both sides understand the possible consequences of non-compliance with the agreed terms.
It’s of utmost importance to ensure the promissory note’s legal compliance with both local and state laws. That can be tricky, so the attorney’s help can be of great importance. Also, always use legally approved forms. They have a clause that the note is governed by the laws of a certain country in case of any legal action.
You can find these templates online. Many websites provide free or low-cost templates which can be a good place to start. Just remember to ensure that they are relevant to your circumstances and don’t violate the law. Last but not least, remember to have all the parties involved sign and date the document. This cements the contract.
No Promissory Note – Now What?
Some people rely on trust too much. That can be a wrong move when it comes to lending (or borrowing) money. With no legal contract in place, the loan terms could be vague and cause disputes between the two parties. Eventually, conflicts pop up, and relationships, whether personal or business, can be ruined.
If one defaults on loan repayment, an oral agreement is much weaker than a written one. No legal remedy can help in this case, and a lender is at a loss in most cases. But with a promissory note, they can prove the lending terms in front of the court and enforce justice.
When there’s no promissory note on business loans, that can make things tricky. It can be harder to track expenses and plan out finances for both people involved in the lending agreement. Borrowers can’t prove their creditworthiness, and lenders have no legal evidence of giving their money out.
Not having a promissory note poses a great risk to both parties involved and leaves things unclear in case of default. Including this document in your agreement makes things much simpler and transparent, so no one is at a loss or risk of legal or financial consequences.